Wisdom of the bear market, of a big bear

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For those unfamiliar with the annual tradition, Fat Bear Week is hosted by Katami National Park and Preserve in Alaska. The event celebrates bears and raises conservation awareness. Every fall, vVisitors to the national park’s website examine photos of bears catching salmon. Visitors vote for the biggest bear in a single-elimination tournament, until at least one last creature is considered the Big Bear. This year’s event garnered nearly 800,000 votes. It’s no small feat to become the chubbiest of them all. Adult bears can gain up to 500 pounds and weigh up to 1,500 pounds before hibernation.

Who is 747?

According to the park, wWhen 747 was first identified in 2004, it was only a few years old and unable to compete with larger bears for favorite fishing spots. But since then, he’s grown into one of the biggest brown bears on the planet, weighing perhaps up to 1,400 pounds. These days, only rival males of comparable size, which are very few in number, challenge 747 for fishing spots. Although dominant bears can maintain their rank in the hierarchy through aggression, 747 generally maintains status solely through size, according to the park.

Being a fat bear isn’t just about looking cute and gaining weight online. It’s a question of survival.As winter approaches, bears feed up to 20 hours a day. The weight they carry protects and supports their bodies through the winter months – in some places up to 7 months – as they shelter in dens. Contrary to popular belief, bears don’t sleep all the time. They wake up, but move little and do not eat or drink and rarely urinate or defecate.

For investors, winter can take different forms. We are witnessing the drop in temperatures, but also the drop in the markets.

So what can a bear teach us about a bear market?

Refuel during the good times:

Prepare for a downturn with a liquidity strategy*, a reserve of resources that are not exposed to market risk.

When fully implemented, your liquidity strategy portfolio should provide sufficient cash flow to cover all spending needs that are not covered by employment or retirement income. During your working years, your salary will cover your expenses, so you only need to build up an emergency fund – six to 12 months of expenses – to cover unexpected expenses or replace a temporary loss of income.

In retirement, we recommend that you fund your liquidity strategy with resources to cover the cash needs of your investment assets for three to five years, which historically would have been long enough for diversified portfolios to fully recoup their losses. The purpose of the liquidity strategy is to help you avoid having to “sell low” in order to finance your lifestyle.

A Core-Satellite approach can provide the best framework for finding the right balance of risk and opportunity in your liquidity strategy, while aligning with your family’s needs:

Heart:A bond scale of high-quality bonds, with maturities staggered over the next 3-5 years (the time horizon of your liquidity strategy should reflect the expected recovery time of your longevity strategy, and the size of the portfolio should reflect all the expenses you plan to take from the portfolio in those years).

Satellite:A portfolio of solutions that can offer increased return potential, using a “three-tier” framework to keep the size and composition of this portfolio aligned with the time horizon of your spending needs. Satellite strategies include core savings strategies, bank deposits, and structured investments that offer capital preservation.

When winter comes, do less:

The S&P 500 has fallen more than 20% this year, which means we are officially in a “bear market”. Like winter, bear markets are not a good time to harvest your crops, but it’s also important not to panic and eat your “grain of corn”, the investments you’ll need to survive the seasons. future.

It is natural to feel the need to do Something in response to market volatility (this is called “action bias”). But, like a hibernating bear, sometimes doing less is the best thing to do.

Remember that bear markets are painful but temporary. Sticking to your plan is key, so resist the urge to change your portfolio’s risk profile or make any big shifts outside of stocks or cash. It’s cold comfort, but once you know you’re definitely in a bear market (e.g. stocks are already 20% below their all-time high), further reduction is unlikely helps – this will most likely lock in losses. which otherwise would have been temporary.

Here are a few ideas that are likely to add value no matter how the market moves:

1. Stay invested and stick to your long-term plan

2. Play to save time. Investors should look for ways to increase their savings rate or reduce their spending. A dollar saved during a bear market could be worth two or three dollars earned in a few years. This is also a time to consider using borrowing facilities as a bridge to avoid locking in losses, but don’t take enough leverage to risk a “margin call” if markets don’t recover quickly.

3. Portfolio management. Tactics to improve returns no matter how quickly markets recover:

  • Bear markets are key opportunities to realize capital losses. We estimate that harvesting tax losses adds about 0.5% to after-tax alpha.
  • Rebalancing is another strategy that reliably helps build upside potential and reduce downside risk. When reinvesting portfolio income or making other portfolio adjustments, try to add to portions of the portfolio that have fallen below your long-term target allocation.

4. Tactical Opportunities. Every bear market is unique, but there are always opportunities to oversell. Market dislocations provide opportunities to improve returns. As a rule of thumb, we recommend “leaning” into risky assets when market prices don’t match fundamentals. If you were well prepared at the start of this bear market, i.e. you isolated your cash needs from market risk, this may be an opportunity to unwind portfolio hedges and slightly increase the portfolio risk to take advantage of the higher return potential of the market.

Don’t forget that spring is coming:

Just as winter always ends eventually and spring always draws bears out of their dens, history has shown that recessions are temporary.Since 1945, there have been 7 major bear markets. Even in these extreme sell-offs, stocks hit a new all-time high in 39 months on average, and the recovery was even faster for diversified portfolios.

This highlights that just when investors would be most tempted to exit the market, they could potentially miss a substantial upside. Although market volatility can be unsettling, by staying invested investors can take advantage of the market rally.

When the financial winter thaws, remember your liquidity strategy. CIO recommends reloading your liquidity strategy every year during bull markets. Like the seasons, markets will change, so do like the bears and prepare for the seasons to come.

For more on what to do before and during a bear market, see the Chief Investment Office articleGuide to the bear market. See the article:Why exiting the market can be costly for long-term returnspublished on August 5, 2022.

And if you want to take a break from thinking about the bear market, check out some real bears including Bear 747,here.

Main Contributors: Wendy Mock, Justin Waring

*Times may vary. Strategies are subject to each client’s goals, objectives and relevance. This approach is not a promise or guarantee that wealth, or financial results, can or will be achieved.

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